Hi QuantSeb,Why is an option on a variance swap an option on a non-traded asset? Variance swaps are traded,and forward variance swaps are just the difference between two variance swaps-> so you can tradethe underlying of your option (as MForde said it's "just" a compound option).That's why I think you should model directly (under risk-neutrality) the (forward) variance swaps, justas forward rates and if you got the vols somehow close to reality (and all the other smallprint), thenyou should be able to hedge the thing. Intuitively (for me, that is) you want to hedge an option ona variance swap by the forward variance swap itself plus maybe some residual sensitivities(the standard Europeans can be used to infer VolOfVol and Correlation to the underlying of thevariance curve).Best
Last edited by probably
on May 31st, 2005, 10:00 pm, edited 1 time in total.